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U.S. Short-Seller Takes Aim at Chinese Vegetable Producer

By Neil Gough August 26, 2013 4:38 amAugust 26, 2013 4:38 am

Updated, 9:58 a.m. |

HONG KONG – Shares in the China Minzhong Food Corporation fell by half in Singapore on Monday after the release of a damning report on the company by the Glaucus Research Group, a short-selling firm based in California.

Shares in Minzhong, which is based in Fujian Province in China and produces fresh and frozen vegetables, were suspended from trading in the morning on Monday, pending the release of an announcement by the company after Glaucus accused it of misleading accounting practices.

In a 49-page report, Glaucus said Minzhong had fabricated sales to its top two customers, doctored its historical asset and earnings filings in China, and vastly overstated its capital expenditures — all in an effort to make its business look bigger to investors than it really was.

Minzhong “has so significantly deceived regulators and investors about the scale of its business and its financial performance that we expect trading in its shares to be halted and its shares to be worthless,” the Glaucus report said.

“The company is in the process of reviewing the report and will provide its response shortly,” Minzhong said Monday night in a statement. “The company will take all necessary steps to defend its reputation and will not hesitate to take legal action against those who put up and disseminate false or misleading statements without due regard to their truth and for the purpose of inducing others to deal in securities.”

Minzhong’s 2010 initial public offering raised 237 million Singapore dollars, or $185 million at current exchange rates, and as of Friday the company had a market value of 665 million dollars. After the Glaucus report was published on Monday, shares in the company fell 48 percent, to 53 Singapore cents, before trading in the stock was suspended.

In the last several years, short-sellers like Glaucus, Muddy Waters and Citron Research have profited by placing bets against the shares of Chinese companies listed on overseas stock exchanges and then publishing critical reports questioning the accounting practices at those firms.

In some cases, such accusations have led to the filing of fraud charges by regulators or to dissolution of the companies. Prominent examples include the Toronto-listed Sino-Forest Corporation, which filed for bankruptcy last year after Muddy Waters accused it in 2011 of being a “multibillion-dollar Ponzi scheme.”

Glaucus was founded by Matthew Wiechert, a former investment banker, “to prod opportunities that appear ‘too good to be true’ in an effort to alert investors and regulators to companies providing misleading public disclosures and inaccurate financial statements,” according to a statement on its Web site. The firm is named after a figure in Greek mythology; Glaucus was a god of the sea with prophetic powers who was known for rescuing fishermen and sailors caught in storms.

In January, Glaucus set its sights on China Metal Recycling, a scrap metal trader listed in Hong Kong, accusing it of drastically overstating the size of its business. Hong Kong’s securities regulator investigated the charges, and last month it pushed China Metal Recycling into liquidation after discovering the company had faked purchases from its main suppliers to make its revenue look higher than it was.

But in other cases, targeted companies have successfully rebuffed attacks by short-sellers.

Last November, Carson C. Block, the founder of Muddy Waters, took aim at Olam International, a company partly owned by the Singaporean sovereign wealth fund Temasek Holdings. Mr. Block claimed that the Singapore-listed agricultural commodities company was “at risk of collapsing” because of its debt load and other factors.

He likened Olam to Enron, the American company that went bankrupt in 2001, saying Olam was “likely to fail.”

Olam’s chief executive, Sunny Verghese, mounted a vocal defense, including a number of conference calls to address Mr. Block’s allegations and take questions from investors. Temasek offered support, increasing its stake in Olam, which sued Mr. Block and Muddy Waters for defamation in Singapore. (The suit was later withdrawn.)

Olam’s shares slumped in the weeks after the Muddy Waters report, touching a low of 1.395 dollars apiece in December, but have since recovered to about 1.50 dollars.

A version of this article appears in print on 08/27/2013, on page B7 of the NewYork edition with the headline: Fraud Accusations.